A snippet on foreign currency loans

I’m always thinking about new things to do with the blog. Some ideas, like the Monday Message Board, have been successful, others haven’t worked quite so well. What I’m doing here is posting a couple of paras I was going to put into an opinion piece, but which I’ve had to cut for space reasons. I hope the blog will provide a way of implementing an idea I’ve had for many years and never fully realised, that of a text database of thoughts on various topics, useful quotes and so on, that I can dip into as needed in my work. Of course, even though a lot of the material won’t be of general interest, I still welcome comments – in fact, comments on esoteric topics are often more useful to me than debate on current issues. I’d also welcome thoughts about the merits or otherwise of this idea and proposals for other uses of the blogging medium.

The idea of offering loans denominated in Swiss francs, pushed vigorously by the major banks received a rapturous receptionin the mid-1980s . What could be more natural as a consequence of financial deregulation than that Australian borrowers should gain the benefits of low interest rates prevailing overseas. No-one bothered to do the elementary risk analysis that would have shown this to be a fundamentally unsound idea, and even in retrospect, its failure was widely seen as the result of bad luck.

In reality, the product was equivalent to the combination of an ordinary Australian-currency loan with an unhedged bet on the foreign exchange market. The interest rate differential between franc-denominated and dollar-denominated loans reflected a market expectation that the dollar would depreciate. Borrowers were invited to bet that the market was wrong. Such a bet made no sense for the vast majority of borrowers and in fact the depreciation was even greater than the market forecast.

Despite the obvious impropriety of advising financially unsophisticated customers to take on gratuitous risks, the banks were generally successful in enforcing their contracts, except where their initial incompetence was compounded by subsequent wrongdoing, such as the suppression of evidence. Judges and the legal system more generally proved incapable of coming to grips with the basic issues.

It’s all very well admonishing the “banks” for advising their financially unsophisticated customers to take on these risks, but do you think the suburban and regional bank managers who did the advising had any idea of what they were talking about? If so, you haven’t met many suburban or regional bank managers.

And if it comes to that, the head office product managers who wrote the memos that went out to the branches telling the managers to push these loans probably had no understanding of what they were doing either. If you think differently, I’d sat you haven’t met too many bank head office product managers either.

This whole sorry affair smells more of a stuff up than a conspiracy. The zeitgeist of the mid 80s was to open up our financial system to the world. It was new, it was dangerous, few people understood the implications and, inevitably, a lot of people got hurt.

Arguably the banks should have had more of a duty of care, but on the other hand, caveat emptor.

As one of those offered such a business loan as a refinancing package during the 80s, I can report that it was more than ‘offered’ – a great deal of pressure was bought to bear. Apart from anything, the bank organised seminars for accountants (including mine) and sought to bring to change minds via that route. Caveat emptor is all very well, but doesn’t really reflect the relative levels of power in the r’ship: it is no easy thing to say no to the person who gave you a loan in the first place. Fortunately, it was one of the bad business decisions I didn’t take, though I couldn’t tell you why beyond the fact that this ‘financially unsophisticated customer’ smelt a rat.

Got no comments on the piece – as a description of the period, it seems a reasonable reprensentation of the facts.

As for blogging as a text database – it’s a good approach. I’ve been doing it for years (we’re behind a firewall, so you don’t get to see anything).

Things to think about are:

1) Transferability – the ability to move all your posts (pieces of information) to a different product with ease. As an aside, I use Frontier,, the big brother of the blogging tool Radio. Interoperability is a big thing for them, and it’s a fully scriptable product so should I move to another product, it’s easy to transfer. For me, the data storage and ease of transfer is one of the reasons I continue to use it (not trying to sell, just putting a trail of logic down)

2) Searching – since your stuff is openly accesible – you can rely on Google at least for the short to medium term. But if you start to run things behind a firewall, you’ll need access to a search engine.

3) Searching is OK, but after a while better information structures can be a bigger help. I find outlines are a terrific way of managing snippets and ideas. I have no idea if MT supports OPML, but it might be worth a look if the MT doesn’t support outlines natively. Conversely, you can begin to think of metadata approaches.

4) Disaggregation – after a while, even chunks of text can get big on storage and management. The ability to break things up for current and past interests is also useful (to be clearer, Frontier has databases into which I breakup a variety of topics to ease the load on various outlines and sites I have).

David, I don’t think I can even take that much credit – I came awfully close to going with it. I don’t know what it’s like now, but back then, even as the brave new world was dawning, for a small player, the power differential was awesome.

Thanks for all the comments – it certainly encourages me to persist with this idea.

In response to Dave’s comments, I think the problem is that no-one actually announced that ‘financial deregulation was meant to end that kind of paternalistic, bank-manager-as-authority-figure’. People simply found out the hard way that they were now dealing with a shonk.

And the fact that the banks were able to make customers bear the consequences of incompetent management contributed to the hubris they displayed right through the 1990s. Deregulation would not have been such a mess if the banks had been made to bear the losses on things like the foreign-currency loans at an early stage.

Finally, I think your correct observation that the bank managers had no idea what they were selling makes it almost certain that the banks were engaged in fraudulent misrepresentation in nearly every case. Employing someone to sell a product who is unaware of its defects makes this outcome inevitable.

Dave, caveat emptor is all very well, as long as there is a basic level of honesty and disclosure about what the product is, which seems to be the nub of John’s argument. It’s not a question of “power differentials” or any such hand-wringing obfuscation . . . it’s simply a question of whether what was being sold was described (a) accurately in all of its material features and (b) in terms that the purchasers could understand.

I would have thought that our contempary understanding of “caveat emptor” kicked in once that basic obligation had been met.

On the substantive question, the key term in the UK for this problem is “Mis-selling”, and since the pension and endowment mortgage scandals we’ve now got quite a decent body of law on the general allocation of legal liability.

On the idea of a text database, Michael Perelman, moderator of the PEN-L mailing list and author of Chrikey nows how many books attributes his incredible productivity to the use of exactly such a system, though he swears by a proprietary indexing tool rather than a weblog.

I told a friend who was thinking of taking out one of these loans that he should instead take out an AUD loan and take $100K of the loan down to the local casino once each year and plonk it on red in two sequential $50K bets. Put like that, I think it helped to put him off the idea. I’m no international financial advisor but I knew exchange rates could swing over big ranges and it seemed to be more like big-dollar gambling to me.

I hadn’t quite twigged the relationship between interest rates and expected exchange movements that could be expected on average to wipe any potential gains from the currency switch. That really puts the icing on the cake of the banks’ culpability for me. A couple of those bank economists should have been put in the box and had the answers to a few pointed questions prised out of their mouths.

I wasn’t too surprised that the banks largely got away with it, either. Mind you, coming after those crazy grab-the-commission-and-run international loans that had been going down for the previous decade or two, it was pretty much the great modern way of running a big bank: I’m outta here, it’s someone else’s job to clean up at pay-up time…